ARTESIAN RESOURCES CORP - Quarter Report: 2001 March (Form 10-Q)

(Mark One)
X     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2001

or

__     TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the transaction period from            to

Commission file number 0-18516

ARTESIAN RESOURCES CORPORATION
(exact name of registrant as specified in its charter)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days      X  Yes       No

     As of April 30, 2001, 1,627,328, shares and 391,824 shares of Class A Non-Voting Common Stock and Class B Common Stock, respectively, were outstanding.

Part I - Financial Information
Item I - Financial Statements

NOTE 1 - GENERAL

     
NOTE 2 - REGULATORY ASSETS

     Certain expenses, which are recoverable through rates as permitted by the State of Delaware Public Service Commission (PSC), are deferred and amortized during future periods using various methods. Expenses related to rate proceedings are amortized on a straight-line basis over a period of two years. The post retirement benefit obligation, which is being amortized over twenty years is adjusted for the difference between the net periodic post retirement benefit costs and the cash payments. The deferred income taxes will be amortized over future years as the tax effects of temporary differences previously flowed through to the customer reverse. Regulatory assets, net of amortization, comprise:

       On May 4, 1999, Artesian repurchased 126,353 shares of Class B Common Stock and 24,165 shares of Class A Non-Voting Common Stock from Helena C. Taylor and Ellis D. Taylor in exchange for a promissory note (the "Note") in the principal amount of $4,450,000 representing the purchase price of the stock, with a discounted present value of $4,307,000. The Note is payable quarterly, on a calendar basis, over a four year period and in sixteen equal principal installments of $278,125 commencing on June 30, 1999. The outstanding balance on the Note bears interest in an amount computed based on the quarterly dividend the Taylor's would have received on the Stock transferred to Artesian but not yet paid for by Artesian. In addition, the principal installment is adjusted on a quarterly basis to reflect changes in the book value per common share of the Company as reported in its most recent quarterly financial statement distributed to stockholders prior to the quarterly payment. Such amounts, if any, represent contingent purchase price of the stock and will be charged to retained earnings. At March 31, 2001, Artesian had $2,225,000 outstanding under this promissory note.

          On December 29, 2000, Artesian Water issued a $20.0 million, 8.17%, twenty year Series O First Mortgage Bond to redeem the Series K $7.0 million First Mortgage Bond and to pay down the lines of credit. On December 29, 2020 the Series O First Mortgage Bond matures.

           On January 31, 2001, Artesian Water Company, Inc. entered into a financing agreement with the Delaware Department of Health and Social Services to borrow funds totaling not more than $4,307,144 from the State's Revolving Loan Fund under an unsecured General Obligation Note. The note bears interest of 4.48%, and is payable ratably over twenty years. The effective rate of the loan, including expenses related to the closing, is 4.57%. The Company intends to use the proceeds of this revolving loan to repay outstanding short-term debt. As such, at March 31, 2001 and December 31, 2000 the Company has reclassified $4,307,144 from notes payable to long-term debt on the balance sheet.

          Artesian Wastewater Management, Inc. ("Artesian Wastewater") is an additional non-regulated subsidiary of Artesian Resources, which provides wastewater treatment services in Delaware. On March 12, 1997 Artesian Wastewater became a one-third owner in AquaStructure Delaware, L.L.C. which markets proposals to design and construct wastewater treatment facilities. Artesian Wastewater operates a small wastewater treatment spray irrigation facility owned by a municipality in Southern New Castle County Delaware. Artesian Wastewater is paid a lump sum fee to maintain operations at the facility.

     The office building and shop complex utilized by Artesian Water are leased at an average annual rental of $180,000 from a partnership, White Clay Realty, in which certain of Artesian Resources' officers and directors are partners. Management believes that the payments made to White Clay Realty for the lease of its office building and shop complex are comparable to what Artesian Water would have to pay to unaffiliated parties for similar facilities.

          Artesian Water leased certain parcels of land for water production wells from Glendale Enterprises Limited, a company wholly-owned by Ellis D. Taylor, the father of William Taylor, a director, at an annual rental of $44,000. Renewal of the lease has been automatic from year to year unless 60 days' written notice is given by either party before the end of the year's lease. During 2000, Artesian was notified by Glendale Enterprises Limited that it desired to discontinue the lease for the well sites. In its attempt to acquire the property from the lessor, Artesian received a claim from an unrelated third party with regard to lease payments made since 1986. In March 2001, the parties agreed to settle the ownership dispute, the third party withdrew its claim, and Artesian acquired the property.

     Expenses associated with related party transactions are as follows:

     Equity per common share was $16.04 and $15.93 at March 31, 2001 and 2000, respectively. These amounts were computed by dividing common stockholders' equity, excluding preferred stock, by the number of shares of common stock outstanding on March 31, 2001 and 2000, respectively.

          In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and Hedging Activities" which establishes accounting and reporting standards for derivative instruments and hedging activities. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and the Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133-an amendment of FASB 133," which deferred the effective date of this standard to financial years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which addresses and amends SFAS No. 133 for a limited number of issues causing implementation difficulties for entities applying SFAS No. 133. The Company adopted SFAS No. 133 incorporating SFAS No. 138 amendments effective January 1, 2001. The adoption of this statement did not have a material impact on the Company's financial condition or results of operations.

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted to collect a temporary increase of $2.5 million on an annualized basis, subject to refund, until permanent rates are approved by the PSC. We cannot predict whether the PSC will approve the requested increase, a smaller increase or any such request.

     Artesian Water, our principal subsidiary, is the oldest and largest regulated public water utility in the State of Delaware and has been providing water within the state since 1905. We distribute and sell water to residential, commercial, industrial, governmental, municipal and utility customers throughout Delaware. As of March 31, 2001, we had approximately 65,000 metered customers and served a population of approximately 214,000, representing approximately 28% of Delaware's total population. We believe that we have a reputation for providing water and service of superior quality to our customers.

     The Delaware Public Service Commission regulates Artesian Water's rates charged for water service, the sale and issuance of securities, mergers and other matters. We periodically seek rate increases to cover the cost of increased operating expenses, increased financing expenses due to additional investments in utility plant and other costs of doing business. Increases in customers served by Artesian Water also contribute to increases in our operating revenues, although such increases have been offset slightly by reductions in customers' individual usage. We continue our efforts to contain expenses and improve efficiencies which contribute to increases in our operating income. Our business is also subject to seasonal fluctuations and the effects of weather.

     We realized 98.2% of our total revenue in the first three months of 2001 from the sale of water. Water sales revenue increased $603,000, or 9.7%, for the quarter ended March 31, 2001 compared to the first quarter of 2000. The increase was primarily due to a 3.8% growth in the number of customers served, and implementation of temporary rates related to a pending rate proceeding.

     Operating and maintenance expenses increased $310,000, or 7.7%, for the quarter ended March 31, 2001, over the quarter ended March 31, 2000, primarily due to a payroll and benefits increase of $269,000 due to additional positions and wage increases. The ratio of operating and maintenance expense to total revenue was 62.6% for the three months ended March 31, 2001 as compared to 63.8% for the same period in 2000.

     Depreciation and amortization expense increased $72,000, or 11.3%, for the quarter ended March 31, 2001, compared to the comparable quarter of 2000, due to capital additions. Income tax expense decreased $5,000, or 2.9% for the quarter ended March 31, 2000.

     Interest charges increased $194,000 or 21.8% for the first quarter of 2001, compared to the first quarter of 2000 due to higher levels of debt due to the issuance of the $20 million series O bond in December 2000, partially offset by the payoff of the $7 million series K bond.

     For the quarter ended March 31, 2001, Artesian Resources recorded net income applicable to common stock of $256,000 which represents a $21,000, or a 8.9%, increase as compared to earnings of $235,000 for the quarter ended March 31, 2000.

     Our primary sources of liquidity for the first three months of 2001 were $5.1 million provided by borrowings on our line of credit and cash flow from operating activities which provided $1.7 million.

     We rely on our sources of liquidity for investments in our utility plant and systems and to meet our various payment obligations. We currently estimate that our aggregate investments in our utility plant and systems for the remainder of 2001 will be approximately $14.9 million. These investments will be financed by our operations and short-term borrowings under our revolving credit agreements. Our total obligations related to dividend and sinking fund payments on preferred stock, interest payments on indebtedness, rental payments and water service interconnection agreements for the remainder of 2001 are anticipated to be approximately $6.1 million and will be financed with cash flow from our operating activities and short term borrowings.

     Developer advances and contributions in aid of construction are used for the installation of mains and hydrants in new developments. An additional $2.7 million of capital expenditures will be financed by developers during the remainder of 2001.

     At March 31, 2001, we had a working capital deficit of $8.4 million mainly due to borrowings on our lines of credit incurred to finance investment in utility plant.

     At March 31, 2001, Artesian Water had lines of credit with three separate financial institutions totaling $35.0 million to meet its temporary cash requirements. These revolving credit facilities are unsecured. As of March 31, 2001, we had $23.6 million of available funds under these lines. The interest rate for borrowings under each of these lines is the London Interbank Offering Rate plus 1.0% or, at our discretion, the bank's federal funds rate plus 1.0%. All the facilities are reviewed annually by each bank for renewal.

     Statements in this Quarterly Report on Form 10-Q which express our "belief", "anticipation" or "expectation", as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from those projected. Certain factors, such as developments in our current rate proceeding, competitive market pressures, material changes in demand from larger customers, changes in weather, availability of labor, changes in government policies and changes in economic conditions, could cause results to differ materially from those in the forward-looking statements.

     None

          On December 5, 2000, Artesian Water filed a petition with the PSC to implement new rates to meet an increased revenue requirement of approximately 22.57% or $6.4 million on an annualized basis. Effective February 3, 2001, Artesian Water was permitted to collect a temporary increase of $2.5 million on an annualized basis, subject to refund, until permanent rates are approved by the PSC. We cannot predict whether the PSC will approve the requested increase, a smaller increase or any such request.

          There are no other material legal proceedings pending at this date.

     Not applicable.

     Not applicable.

     Not applicable.

     Not applicable.

     No reports on Form 8-K were filed for the quarter ended March 31, 2001.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.